Can government-approved pot beat street weed?

Author

Associate professor of operations research, Goodman School of Business, Brock University

Disclosure statement

Michael J. Armstrong does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

To answer the question, consider the “four Ps” that marketers work with in every industry. Those are the product characteristics, price charged, place where sold and promotion activity. From this viewpoint, legal vendors have some potential advantages. But they face major challenges under current government plans.

Pricing challenges

Price is the competitive element politicians mention most. In Colorado, cheap legal cannabis means black markets control only 20 per cent of state sales. But in Washington state, where prices are higher, black markets capture 50 per cent.

In Canada, governments agree cannabis prices must be competitive. They’ve suggested $10 per gram, including excise and sales taxes.

Other pricing questions remain unanswered. Will all products share the same price? Or will prices differ by brand? Will each retailer set their own prices?

Retailers lack convenience

The places cannabis is sold also affect competitiveness. The western provinces will allow private-sector retailers. Ontario and its eastern counterparts are keeping retail in the public sector.

The public-sector plans lack convenience due to limited store numbers. That aids the black market.

For example, Ontario plans 150 outlets by 2020. That’s only one per 95,000 people, about as common as Walmart. It’s enough for planned shopping trips, but not for consumers who have unexpectedly run out.

By contrast, Ontario has 2,067 locations selling alcoholic beverages: One per 7,000 people. Those include liquor agency outlets, beer stores and wineries.

Some critics even want plain packages, to discourage cannabis adoption. But that would make it harder for growers to establish reputations, neutralizing a key advantage over illicit products.

It would also reduce growers’ incentive to boost quality, especially if prices are fixed. As near generics, they’d instead try to lower production costs. Or perhaps hike THC numbers to stand out. Should we encourage cheaper, stronger pot?

The lack of edibles, like brownies and beverages, is a glaring gap. Ottawa won’t legalize those for another year. Unlawful suppliers keep market control until then.

A cupcake edible is shown at a stall at a Green Market pop-up event in Toronto in December 2016.THE CANADIAN PRESS/Chris Young

Promotion limits

Federal rules also limit promotional activity. “Informational” ads are OK. But no evoking emotions, and no lifestyle depictions involving recreation or excitement.

Regarding in-store promotion, New Brunswick will display products under glass. Consumers will see packaging, read labels and visually compare products.

But Ontario wants things “similar to how tobacco is now sold.” That implies customers won’t see or touch products before purchase. It’ll be tough for consumers to develop preferences, and for growers to build reputations. That further weakens legal products’ competitiveness.

Black markets will initially out-compete the provinces with convenient places. That will decrease over time, especially out West. But it won’t disappear without legalized lounges. Illegal vendors may always have some price advantage. Provinces can minimize that by forgoing profits.

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Lack of clear evidence on impairment from cannabis use has led to vastly different workplace policies. Police officers in Ottawa and Vancouver face no restrictions on their off-work use of cannabis as long as they are fit for duty, officers in Calgary have been banned from use and in Toronto they face a 28-day abstinence period.
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